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Three Commodity ETFs That Have Not Surged

Over the past six months, many commodity ETFs have moved sharply off of their lows thanks to renewed confidence in the economy. Broad commodity products such as the PowerShares DB Commodity Index Tracking Fund (DBC - Free Report) or the GS Connect S&P GSCI Enhanced Commodity TR ETN (GSC - Free Report) have rebounded nicely from their slump in the early fall of 2011 and now both are firmly in the positives when looking at the past six month period. Unsurprisingly, both of these funds have been led higher by surging prices in oil, as well as strong performances in many precious metals as well.

Yet while both of these sectors have risen well off of their lows, other, more specific segments of the commodity space haven’t been so lucky. This suggests that while commodities have been broadly moving higher, it is by no means universal. In fact, several are still posting significant losses when looking at the previous six months. Below, we highlight three of these commodities which show that not every commodity has seen a strong trailing half year period:

This note from iPath looks to give investors access to carbon-related credit plans, acting as a benchmark for those in the industry. The index currently consists of two carbon-related credit plans: the EU ETS Phase II and the Kyoto Protocol’s Clean Development Mechanism. Still, EU units comprise the bulk of the ETN, accounting for nearly 90% of the total assets. However, the product is really the only way to play the market at this time, charging investors 75 basis points a year in fees (read Is USCI The Best Commodity ETF?).

GRN has seen a horrendous past six months, having lost about 43.1% in the time period, far worse than many other products in the commodity world. This performance is likely due to fears of a slowdown in Europe and speculation over lower industrial demand across the continent. Given this, demand for carbon credits was probably lower than it would have otherwise been, crushing the market for GRN.

Beyond this, investors should note the large number of political issues that go into a product like this. There has been some oversupply built into the market thanks to EU governments, but now it appears as though some may be looking to support carbon prices. Additionally, there are also some rumors over implementing a new program entirely or adopting the UN’s Assigned Amount Units system after this year. In fact, thanks to this speculation, GRN has actually added about 24.4% so far in 2012, further demonstrating how rough the final part of 2011 really was for this note (as the -43.1% includes the recent run-up) and how important politics are to this product (read Three Best Gold ETFs).

This product looks to give investors exposure to the commodity of natural gas, a key fuel source for power plants. The product invests in near month natural gas futures that trade on the NYMEX, except when the contract is within two weeks of expiration. When this happens, UNG will look at the next month’s contract for exposure. It is also worth noting that the fund is quite popular, having amassed about $950 million in assets while trading about 14.5 million shares a day.

Yet while many other energy commodities, specifically crude oil and gasoline, have seen surging in prices in the last few months, UNG has not shared their fate. The fund has seen a terrible run of performance, losing about 45.4% in the past six month period and then 83.8% in the past three years. Obviously, this is pretty bad, especially when investors factor in the 85 basis points in fees that investors have to pay a year, adding further injury to those betting on UNG (read Is HAP The Best Commodity Producer ETF?).

While the fuel is still vital and doesn’t appear to be going away anytime soon, it has really become a victim of the fracking revolution over the past few months and years. Now, tapping into once hard-to-reach deposits of the fuel is relatively easy, greatly increasing the supplies of natural gas. Given the vastly increased supply and the small increase in demand, prices have had nowhere to go but down. Unless investors see a broad embrace of LNG or CNG technologies on a wide scale, these trends look poised to continue for the foreseeable future in the natural gas market.

For investors looking to invest in the commodity of coffee, the basis for the popular beverage, JO is a top choice. The note looks to match the returns that can be earned by investing in front month cocoa futures with the addition of the return from cash collateral invested in specified Treasury Bills. The fund has about $22 million in AUM and sees relatively modest volume of about 47,000 shares a day. However, the product does charge investors 75 basis points a year in fees, inline with many other commodity ETNs (read Inside The FlexShares Natural Resource ETF).

JO, like many other soft commodity ETNs, has seen a rough half year period, slumping by about 29% in the time frame. Coffee’s slump in particular has been due to huge oversupplies in the market, specifically from Brazil. There is growing speculation that Brazil will produce a record crop this year, crushing the previous record that the nation set in 2002. In that year, Brazil produced 48.5 million bags of Arabica coffee while this year’s harvest could see close to 55 million bags, potentially putting more pressure on prices.

Beyond Brazil, exports could also be surging from the second biggest exporter, Vietnam, as well. The country was holding back much of its stock waiting for higher prices in the market. While JO saw a modest increase in early February, prices have already come back down and the threat of more supply from Asian markets could keep prices depressed going forward as well. Given this, JO could continue to see weakness going forward, possibly continuing to outpace other soft commodities on the downside as we stretch further into 2012.

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